Dec 23 2008
Yields on bonds backed by credit-card payments rose to record highs relative to benchmark interest rates as the number of Americans losing their jobs surged to the fastest pace in 34 years.

The gap, or spread, on AAA rated credit-card bonds maturing in three years rose 25 basis points to a record 575 basis points more than the one-month London interbank offered rate during the week ended Dec. 4, according to JPMorgan Chase & Co. data.

Credit card issuers including Citigroup Inc., American Express Co., Bank of America Corp., JPMorgan, Discover Financial Services and Capital One Financial Services are finding it too expensive to rely on the asset-backed market to raise cash for new loans. The high cost to sell the debt chokes off funding and makes it more expensive for companies to lend to consumers.

“While trading volume is relatively low, reflecting the typical year-end slowdown, a few accounts selling into distressed bids drove another round of weakening,” the JPMorgan analysts led by Chris Flanagan said in the report.

Shares of American Express, Capital One and Discover may decline as much as 24 percent from last week’s closing prices in the next 12 months as issuers increasingly bear the burden of “credit stress” among U.S. consumers, according to Kenneth Bruce, a Merrill Lynch & Co. analyst.

The crumbling job market is making it harder for households to keep up with bills and increasing concern that credit-card defaults will rise. U.S. companies cut 533,000 jobs last month, the fastest pace since 1974, the Labor Department said Dec. 5. The unemployment rate rose to 6.7 percent, the highest level since 1993.

‘Ugly’ Report

“The ugly employment report further highlights the downside in consumer credit,” the JPMorgan analysts said.

U.S. Treasury Secretary Henry Paulson’s plan to bolster investment in debt tied to consumer payments hasn’t revived the market for credit-card securities. There have been no sales since September, according to Merrill data, compared with a combined $22 billion sold during October and November last year.

Credit card companies will face “significant pressure” on earnings through the first half of 2010 as consumers reduce debt and loans sour, Wilson said in a report today.

The share of credit-card debt held on commercial bank balance sheets is rising as the credit markets remain shut to asset-backed issuers, according to Wachovia Corp. analysts.

“Our expectation is to see a continued substitution of balance-sheet financing for capital markets financing in the near term,” the Wachovia analysts led by Glenn Schultz in Charlotte, North Carolina, said in a Dec. 5 report.

TALF

The Term Asset-Backed Securities Loan Facility, or TALF, will commit as much as $200 billion to finance the purchase of asset-backed securities, the Federal Reserve said. The Treasury will provide $20 billion in credit protection for soured loans. Details of the plan haven’t been completed.

Honda plans to sell $297 million in debt backed auto loans, a person familiar with the sale said today. The sale is the second issue of bonds backed by car loans since Paulson unveiled the TALF on Nov. 25.

Sales of bonds backed by credit-card payments and auto-loans plummeted 40 percent this year to about $94.8 billion, Merrill data show.

Source: http://www.bloomberg.com/apps/news?